At the start of the year I explored the outlook for telecoms valuations, following on from what was a mixed year in 2019 for share price performance in the sector. The simple conclusion was near-term sector valuations would be driven more by local market considerations, whether political, regulatory or competitive, rather than any overriding themes. Longer term, a new sector growth story was required for a sustained uplift in valuations and share prices.
The current Covid-19 (coronavirus) pandemic and the material impact on both the global economic outlook and the living and working arrangements for a large proportion of the world mark an appropriate time to revisit this outlook. While telecoms has been front and centre in the Covid-19 discussion in terms of network resilience and the shift to home working, the medium-term outlook, once some degree of normality returns, remains uncertain.
A particular challenge at times of global economic crises is that policy response can drive overall stock market and relative sector performance, with company fundamentals of less relevance. Recent moves by many governments and central banks include payments to workers and large loans to businesses, alongside further interest rate cuts, injecting up to $13 trillion into global financial markets, based on Morgan Stanley figures.
Near-term impact: lessons from Q1
As much of the world is still in lockdown, the initial focus of the Covid-19 impact has been on how operators would maintain their networks and meet surging traffic volumes. Mobile operators have responded by offering free data and services to their users, while also benefitting in some cases from access to additional spectrum resources to manage increased traffic volumes.
As companies and individuals begin to adjust to new realities, and indeed as some countries beginning easing lockdowns, the key question shifts to the impact on financial performance. China was the first country hit by Covid-19 and is one of the first now emerging beyond lockdowns, giving some good evidence of how operators will fare as the situation improves.
First quarter results from the Chinese operators were resilient, with modest service revenue growth (1 per cent) an improvement over the prior year and with March already showing a recovery in new subscriber numbers, driven by 5G adoption. Consensus financial forecasts for the rest of the year are largely unchanged, reflecting optimism of the ongoing uptick in 5G demand. Share prices of the three operators have recovered strongly since market lows in mid-March, even if in relative terms they have underperformed local market indices.
There has been a similar pattern across Asia, with resilient results and operators actually outperforming their local indices, both into the downturn and indeed in the recent stock market recovery period. The situation in the US and Europe has been more mixed, with European operators performing broadly in line with the market since mid-February while delivering overall solid results.
Research by Credit Suisse underlines the general resilience of the telecom sector to date (see chart, below, click to enlarge). The company looked at 102 telecom companies across the world, finding only 10 per cent of them had pulled (id est, withdrawn) guidance for the current year, while only 7 per cent had cut shareholder returns. A number were continuing with, or in some cases even increasing, share repurchase plans.
How may Covid-19 shape telecoms going forward?
Beyond near-term financial results, Covid-19 may have some longer-lasting impacts on the telecom sector:
Where does this leave sector valuations: opportunities on the horizon
So, has the conclusion on the sector outlook changed since the start of the year, even in the midst of a pandemic? In the short term probably not: telecoms remains relatively defensive and the outlook for revenues and earnings is robust. The speed uplifts of 5G, especially as network coverage expands and device availability improves, could boost consumer appetite for the new service.
In the medium term, as the world fully emerges from lockdowns, the backdrop of new ways of working and potential shifts in the dominant globalisation model does suggest a more interesting opportunity. Shorter supply chains and the re-shoring of manufacturing, as well as general efforts to ensure more overall resilience across industries, will lead to an acceleration in the rate of automation in both manufacturing and services.
In this scenario, 5G could gain added relevance, promising a range of new services to consumers and enterprises just as the demand for new types of interactive consumer entertainment, remote medical consultations and industrial automation (to name just a few) is growing. Leveraging their role as trusted network providers, the scope to integrate new services and gain a greater share of enterprise revenues is clear.
The challenge as ever will be developing new business models and services to meet this opportunity. The good news is that the search for 5G use cases and returns has already prompted operators into action, and customers will prove more receptive to new ideas as they look to adapt to the realities of the post-COVID world.
– David George – head of consulting, GSMA Intelligence
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.Subscribe to our daily newsletter Back